What are the benefits and risks of a guaranteed loan from a UK lender?
Guaranteed loans come with their own pros and cons. You should be prepared for both if you are planning to borrow funds through the same loan product. The loans are quite popular in the UK as they offer assurance of approval for a loan. However, there is still so much to know more about these funding options.
The guide below will reveal the technicalities related to a guaranteed loan in the UK.
What are guaranteed loans?
An assured loan is a borrowing opportunity that mandates the presence of a guarantor to borrow money. A borrower needs to include anyone from close friends and family as a guarantor. The latter one will be responsible for paying instalments in case the prime borrower defaults.
What are the benefits of taking guaranteed loans in the UK?
Let us know the pros of taking a loan with a guarantor condition. Later, you will get to know the risks of the same to enable you to take an informed borrowing decision.
- Borrow with bad or no credit history
Guaranteed loans are basically designed to help fund seekers with a complicated credit record. Poor credit history or having no borrowing history at all makes it difficult to get a loan approval. You can relate to this situation better if you belong to any of these two credit score conditions.
Hence, the first benefit that you notice of a guaranteed loan is that you can borrow money with poor or no credit history.
- Improve your credit score or build a credit record
It is obvious that if you can get a loan irrespective of your credit score status, it is like an opportunity to improve your credit record. If you maintain a less-than-good credit score, timely payment gives a sharp rise to your credit rating. On the other hand, if you have no payment history, timely instalment payment builds your credit history.
In both cases, the loans with a guarantor act like a support system. They not only erase your money crisis but also shape your financial future. With an improved credit record, you can explore the best deals on loans, investments, insurance products, etc.
- No collateral required to get a loan
A guarantor is sufficient to qualify for the desired amount at affordable rates. Hence, no need to pledge assets to avail funds. This certainly brings relief to you as a fund seeker.
Especially during urgent needs for funds, it becomes vital to get instant money. Financial emergencies can be brutal sometimes, not leaving much time to arrange funds. Hence, you can borrow money without any fear of losing assets.
- Higher approval rate
As the loans include another person to guarantee your loan repayments, this borrowing option has a high approval rate. This is what makes the concept of a short term guaranteed loan a reality.
99% of loan applications get instant approval. Applicants need to have a satisfying repayment ability. The guarantor should have a strong payback ability. The primary applicant may have a low or no credit history, but a guarantor should always have a good credit score.
Now relate this condition to your loan request for these loans. Both should have a regular income source. In that case, having a regular income of only one that guarantees your repayments is not sufficient. You too should have financial stability to prove, and also working with the same employee for a long time may also be a priority of the loan provider.
What are the risks of a guaranteed loan in the UK?
Here comes the other side of the coin that talks about the challenges of taking a guaranteed loan.
- Finding a guarantor is complicated
Of course, these days, when everyone is struggling hard with finances, it is difficult to find someone who is ready to be your guarantor. Hence, the first challenge of these loans is to find a person who is ready to take responsibility for their loan instalments.
It is like you will be using the funds for your personal purposes, but someone else will be responsible for your repayments. However, that is only in the case of default. But still, it is a big accountability to take. Especially if you have a poor or no credit history, finding someone to support you becomes even more crucial.
- Credit impact on the guarantor’s finances
If you fail to make payments, the guarantor will have to pay the instalments. But it does not end here only. Due to your delayed repayments or default, the guarantor’s credit score drops sharply.
As a result, the person supporting your loan application will not be able to get good deals on loans in the future. Your supporter will have to bear the consequences of your weak payment behaviour. This is why finding a guarantor becomes a complicated thing.
- Guarantor’s creditworthiness gets restricted
Yes, due to supporting your loan request, your guarantor now has a limited credit purchase power. In case they want to get a loan for personal purposes, they may not qualify for a large amount. Also, getting a low interest rate as per their requirement may not be possible.
This is why, usually, people do not want to be a part of someone else’s obligation. They have a genuine reason if they are afraid to add their creditworthiness for your loan request.
- High interest rates for bad credit borrowers
It is true that with the presence of a guarantor, borrowing becomes more affordable for the main applicant. However, if you are the primary fund seeker, your credit purchase power is still a decisive factor for approval. If direct lenders can provide loans on benefits on your individual repayment ability, then for guaranteed loans, your finances do come under notice.
This is why having someone to back your application during bad credit is not sufficient to secure a lower rate of interest. After all, you will always be the first one to make repayments. Hence, due to your poor credit rating, getting cheaper loan deals may not be possible.
Conclusion
Above, the rational scrutiny of guaranteed loans in the UK will help you make your next borrowing decision. If you want to include someone in the loan process, make sure you know about all the above factors.
Also, it is your responsibility to make your guarantor aware of their responsibilities. Always pay your instalments on time, as someone may get into financial chaos due to your financial behaviour.
Paul Smith is an established financial author and writer with over nine years of experience, who specialises in personal finance, loans, credit management, and investment strategies for people throughout the UK. Paul’s expertise can be seen on leading loan websites such as Bargainloans. Through his blogs and articles Paul has helped thousands of borrowers make wiser financial decisions while his passion for study encourages people to take control of their finances with greater confidence and clarity
